Election-related liquidity seen as key risk to MPC decision

Election-related fiscal injections and rising system liquidity are emerging as the dominant risk shaping expectations ahead of the Central Bank of Nigeria’s (CBN) Monetary Policy Committee (MPC) meeting, with analysts saying that premature easing could destabilise recent gains in inflation and exchange rate stability.

Despite declining inflation and improving macroeconomic fundamentals, analysts say the CBN is likely to prioritise liquidity control over rate cuts, reflecting concerns that election-cycle spending could inject significant liquidity into the financial system and reignite inflationary pressures.

Analysts at the FMDA research in their pre-MPC assessment noted that election-related fiscal expansion seems to be a major concern to the Committee based on their last meeting in November 2025.

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Liquidity surge complicates easing outlook

Liquidity conditions remain central to the policy outlook. According to CardinalStone Research’s macroeconomics update, the CBN has already net-issued N10.9 trillion in Open Market Operations (OMO) this year in an effort to absorb excess liquidity and prevent renewed inflationary pressure.

CardinalStone analysts noted that liquidity conditions are expected to intensify further, particularly as election-related spending accelerates.

“Of the total expected liquidity of N44.2 trillion in 2026, over 75 percent is projected to enter the system in the first half of the year,” the Analyst said, noting that election-related liquidity injections could heighten risks to inflation and exchange rate stability.

This liquidity overhang complicates the policy outlook, especially as monetary authorities attempt to consolidate gains in inflation moderation and exchange rate stability.

MPC, the governor flags election liquidity asa  major risk

The CBN’s caution reflects growing internal concerns about liquidity risks, particularly in the context of the election cycle.

At its last meeting, fiscal and election-related spending was identified as a major upside risk to inflation and macroeconomic stability, with nearly 8 out of 11 MPC members explicitly highlighting concerns about election-cycle liquidity injections as the country moves closer to the election period.

Olayemi Cardoso, the CBN Governor, reinforced this position during his presentation at the recent National Economic Council (NEC) meeting in Abuja, warning that election-related liquidity expansion has historically posed risks to macroeconomic stability.

“Typically, election cycles see a lot of money pumped into the system, and this must be carefully monitored to ensure it does not destabilise the bold reforms that have restored economic stability,” Cardoso said.

He further warned that significant liquidity overhang remains in the financial system and must be carefully managed to prevent renewed inflationary pressures and exchange rate instability.

These concerns explain the central bank’s preference for liquidity tightening tools rather than premature monetary easing.

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FX stability is vulnerable to election uncertainty

The naira has strengthened significantly in recent weeks, appreciating nearly 7 per cent year-to-date in the official market, supported by strong capital inflows and improving investor confidence.

However, CardinalStone warned that election-related uncertainty and rising liquidity could trigger capital outflows, particularly from foreign portfolio investors who have benefited from recent currency gains.

CardinalStone estimates foreign portfolio investment positioning at $12 billion to $14 billion, warning that recent naira gains could increase the risk of investor exits as election-related uncertainty builds.

Such outflows could increase exchange rate volatility and complicate monetary policy decisions.

Analysts see MPC holding rates to signal discipline

Given these liquidity risks, analysts broadly expect the MPC to maintain its current policy stance, though some see a rate cut.

Analyst at FMDA said the Committee is likely to hold the Monetary Policy Rate (MPR) at 27 per cent, prioritising inflation stability and liquidity control.

“Our baseline expectation is that the MPC will hold the MPR at 27 percent, prioritising inflation stability and liquidity control amid election-related fiscal risks,” FMDA said.

Similarly, CardinalStone assigned a 60 per cent probability to a policy hold, noting that maintaining current rates would reinforce policy credibility and help manage liquidity risks.

“The CBN may be inclined towards holding the policy rate constant to signal its concern about liquidity risk, while adjusting liquidity tools to maintain monetary stability,” CardinalStone said.

Instead of cutting rates, analysts expect the central bank to rely on liquidity management tools such as OMO issuance and corridor adjustments to guide short-term interest rates without undermining its anti-inflation stance.

However, some analysts hold a more dovish view, citing moderating inflation and currency stability as key drivers of potential easing.

Lukman Otunuga, senior market analyst at FXTM, said recent macroeconomic developments have strengthened the case for lower interest rates.

“Lower food prices have helped offset inflationary pressures, paving the way for the CBN to cut rates in February after leaving benchmark rates at 27 percent in November,” Otunuga said.

He added that the naira’s appreciation has further reinforced the case for easing.

“So, the question is not if but how much the CBN will slash interest rates next week,” he said.